Question

When and why Fed buy Millions of bond from bank? When and why the Fed sell Millions of dollars of bond to the banks? Is it a fiscal or monetary policy?

Answer 1

When Federal Reserve purchase the bonds or the government approved securities from the commercial scheduled banks it means that federal reserve is following the expansionary monitory policies. Banks in return get money in return of this bonds, then again this money is approved as loans to its customers and finally this money is circulated in the economy in the form of wages/incomes thus increasing the overall aggregate demand in the economy by raising the purchasing power parity of the people.

Similarly when Federal Reserve sell this securities/ bonds to the banks, in return it promise higher rate of interests, thus banks in order to make profits purchase this bonds and deposit money with the Federal Reserve, this policy of the Federal Reserve is called the contractionary monitory policy. This act reduces the flow of money in the market, thus reduces the aggregate demand and help in controlling higher inflation rates.

It is a Monitory Policy.